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In November 2020, UK Chancellor Rishi Sunak ordered a review of the UK listing regime in response to concerns that the incumbent framework is outdated and ill equipped to cater for innovative, fast-growing enterprises looking to float.
The resulting report, produced by Conservative politician Lord Hill, was published on 3 March 2021 following a four-month consultation and contains several recommendations that, if implemented, will fundamentally alter the UK equity capital markets environment.
The report notes that businesses representing the ''old economy'', such as banks and financial intermediaries, compose a disproportionately large share of the FTSE indices.
This is in sharp contrast to the US, where Silicon Valley’s technology companies represent roughly a quarter of the S&P 500 in terms of market capitalisation.
Fears that London is losing its appeal as a listing venue are exacerbated by the fact that city accounted for just 5% of global IPOs between 2015 and 2020.
For many businesses, despite the depth of capital and quality of professional advice on offer, the London markets are seen as less attractive than rival stock exchanges in US and Asia and, more recently Amsterdam, which provide more flexibility.
Making London a more attractive listing venue
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Dual class share structures (DCSS)
Analysis of listing trends indicates that this is seen as a disincentive for fast-growing companies – such as those in the technology and life sciences sectors – to list in London, as opposed to the US where DCSS are more common.
Although company founders float businesses for different reasons, the UK Listing Review report notes that some founding shareholders are reluctant to cede control of their businesses to equity investors, before they have realised their visions for the company.
It suggests that providing a transition period, during which founders are able to maintain a degree control of their business post-IPO through the use of DCSS, is a sensible way forward.
The report also calls for a change to the Listing Rules to allow companies with DCSS to list on the Premium Segment of the London Stock Exchange, subject to safeguards designed to maintain high corporate governance standards.
The proposals include imposing a five-year cap on DCSS arrangements. At the end of the transition period, companies would either be subject to the Listing Rules applicable to the Premium List, or be forced to move segment.
Such an arrangement would have allowed the Hut Group, which completed its £5.4 billion IPO in London in September 2020, to join the Premium List as opposed to the junior, Standard Segment.
Its Standard listing prevents the Hut Group from being included in the FTSE indices, meaning its shares are not eligible to be purchased by increasingly popular index tracker funds.
Other recommendations in the report include a maximum weighted voting ratio of 20 to 1, requiring the holders of such "Class B" shares to be directors and limiting transfers of the shares.
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Free float
The purpose of the free float is to ensure sufficient liquidity in the traded shares. However, relinquishing a quarter of a company’s equity to retail investors significantly erodes management's control of the business.
The 25% free float requirement is viewed as deterring high-growth companies and those backed by private equity investors from joining the London Stock Exchange's Main Market, particularly as no similar requirements exist for listing on the NYSE or NASDAQ.
To provide further flexibility, the report suggests that companies with differing market capitalisations should use alternative measures to show sufficient liquidity in their shares, instead of relying purely on the free float percentage.
For larger companies, this would involve demonstrating:
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A minimum number of shareholders;
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A minimum number of publicly-held shares;
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A minimum market value of publicly-held shares; and
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A minimum share price.
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Rebranding the Standard Segment
The report calls for the Standard Segment to be rebranded using more meaningful terminology (although to what extent renaming it the "Main Segment", as suggested by the report, would benefit this segment are questionable).
Issuers view the Standard Segment as unattractive primarily because companies in this segment are unable to join the FTSE indices – a restriction that the report argues should be lifted.
It calls for investor groups to develop guidelines on areas they see as particularly important (such as DCSS and key corporate governance protections) to allow companies on the rebooted Standard Segment to be index-eligible.
The report proposes that if these perceived issues can be addressed, the flexibility offered by the Standard Segment could attract a large cluster of like-minded companies, creating momentum and attracting others to join.
Overhaul of the prospectus regime
Perhaps the most significant proposal to come out of the Listing Review is the recommendation to overhaul the prospectus regime to better reflect the depth and maturity of the UK’s capital markets – in particular, to increase retail participation in equity issuances.
Companies seeking to raise capital in the UK often structure fundraisings to exclude public investors so they can side step the burden of producing a prospectus.
This means the practical effect of the prospectus regime is that it can operate to the detriment of the non-professional investors it was designed to protect.
The report argues that the UK should return to a prospectus regime akin to that which existed before the domestic implementation of the EU Prospectus Directive (in 2005) and Prospectus Regulation (in July 2017).
The mooted changes include:
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Changing the prospectus requirements so that admission to a regulated market and offers to the public are treated separately;
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Amending prospectus exemption thresholds so documentation is only required where necessary; and
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The use of alternative listing documents (e.g. upon secondary issues).
While SPACs have been popular alternatives to traditional IPOs in the UK in the past, they have fallen from favour partly because of how they are treated by the UK Listing Rules.
When a UK SPAC acquires a private company, the transaction qualifies as a reverse takeover (RTO).
Pursuant to Listing Rule 5.6.8, there is a "rebuttable presumption" that, in the event of an RTO undertaken by a shell company, there will be insufficient publicly available information for the shell company to assess its financial position and inform the market accordingly.
Subsequently, the SPAC shares are suspended and trading cannot resume until a deal prospectus is published, for which there is no deadline.
This means investors in these vehicles in the UK risk tying up their capital indefinitely, unlike equivalent transactions on the NYSE, NASDAQ or Amsterdam, which do not have the same constraints.
According to the UK Listing Review Report, £63.5 billion was raised in 2020 via SPAC vehicles in the US compared to just £30 million in the UK last year.
The report suggests that the FCA removes the rebuttable presumption of suspension and replaces it with appropriate rules and guidance to increase investor confidence in SPACs and align their regulatory treatment with that of other commercial companies.
Specifically, the report recommends that the FCA considers developing appropriate rules and guidance on the following points:
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Exactly what information SPACs must disclose to the market upon the announcement of a transaction in relation to a target company;
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What rights investors in SPACs must have to vote on acquisitions prior to their completion;
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What rights investors in SPACs must have to redeem their initial investment prior to the completion of a transaction; and
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If necessary, a threshold for the size of SPAC below which the suspension presumption may continue to apply.
Lord Hill's report crystallises many of the changes capital market participants consider desirable to preserve the UK's competitiveness for public companies.
While the UK's post-Brexit status gives it more freedom to amend its capital markets environment, any substantive changes to the UK Listing Rules, and the prospectus regime, will require further regulatory consultation and consideration.
The FCA has welcomed the report's proposals and indicated that it aims to publish its own consultation paper by summer 2021 and, subject to feedback, will seek to make rule changes by the end of the year.
Primary legislation will also be necessary to codify many of the recommendations.
While there is some concern that any change will lag the current perceivable upswing in global capital markets activity, a rush of IPOs on the London markets, which began in the final quarter of 2020 and has continued into 2021, indicates that despite the potential drawbacks of the listing process, the UK remains an attractive place to list.
This article was authored by Jack Mason-Jebb, corporate solicitor at Fieldfisher.
